In a deal struck with state officials at the Colorado Civil Rights Commission, Jack Phillips from the Denver suburb of Lakewood also agreed to end his counter lawsuit against the public body.
Jim Campbell, a lawyer for the Alliance Defending Freedom group which had been defending him, said: "We hope that the state is done going along with obvious efforts to harass Jack.
"He shouldn't be driven out of business just because some people disagree with his religious beliefs and his desire to live consistently with them."
The Commission initiated proceedings after it found reasonable grounds to believe Mr Phillips had discriminated against Autumn Scardina by refusing a request for a cake to mark her transition from male to female.
The owner of Masterpiece Cakeshop then initiated his own lawsuit, arguing his view that gender "is given by God...and cannot be chosen or changed."
As part of the new deal, both sides will now pay their own costs and legal fees. It remains unclear whether Ms Scardina intends to embark on legal action of her own.
Colorado Attorney General Phil Weiser said: "The larger constitutional issues might well be decided down the road, but these cases will not be the vehicle for resolving them
"Equal justice for all will continue to be a core value that we will uphold as we enforce our state's and nation's civil rights laws."
Speaking with Premier in 2018, Mr Phillips said he was prepared to take the case all the way to the US Supreme Court.
Last year, it ruled in Jack Phillips' favour after he refused to decorate a cake with a pro-gay marriage slogan.
The most senior court in the United States concluded in June that the Commission has displayed anti-religious bias when it sanctioned Mr Phillips.
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